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Experts: System of Value Added Tax (VAT) electronic administration to be improved further

Kyiv, July 29, 2015. Despite attempts to improve the system of value added tax (VAT) electronic administration (or e-administration), the new platform has not lived up to its declared mission. The VAT e-administration’s goal was to reduce corruption and introduce equitable interaction between the state and taxpayers. Experts of the Reanimation Package of Reforms (RPR), Illya Neskhodovskyi and Mykhailo Sokolov, expressed these sentiments during a press briefing at Ukrainian Crisis Media Center as a part of the Ukraine Reforms Communications Taskforce.

On July 28, the President of Ukraine signed the law, making changes to Ukraine’s Internal Revenue Code to improve VAT administration (Law №2371а). As envisaged by the law’s authors, the Cabinet of Ministers of Ukraine, Law Number 2371a is supposed to eliminate drawbacks of the current VAT e-administration system. The new system has been functioning in Ukraine in ‘test mode’ since January 1, 2015. It has been fully operational since July 1. The system is supposed to improve cash security for VAT liabilities as well as automatic reimbursement of excessive tax payments.

Instead, the VAT e-administration system received strong criticism from business leaders. Tax authorities were accused of ‘washing out’ current assets, in other words, attempting to hide cash shortages in the budget. Businesses appealed to the principles of the administrators in charge of the new system. Business community opinion leaders still believe intrusion on the part of fiscal authorities is likely. Experts highlighted that due to the long-lasting legacy of mismanagement in Ukraine, this may result in introducing corruption schemes.

Additionally, taxpayers are concerned with settlements on VAT payments and reimbursement through the Treasury. Funds paid to the VAT system have no designated use and are thus transferred directly to the government’s budget. Excessive VAT payments are reimbursed from the state budget, thus linking reimbursement to funds available in the state budget. “We decided to reduce VAT payments to order and attempted to eliminate tax evasion possibilities. Nevertheless, the government must also meet their obligations. The state should be fair and include only the difference between the paid VAT and the amount of reimbursement in its budget. It cannot act according to the previous scheme, in which the state would apply all the VAT paid to its budget and then later define the feasibility of reimbursement depending on its funds. If the state does not repay VAT [overpayments], it becomes a turnover tax, which is illegal,” said Sokolov, an RPR expert.

The speakers reminded the public that both business leaders and experts provided proposals to improve the VAT e-administration system. The proposals included postponing launching the system’s fully operational mode until January 1, 2016 (according to draft laws №2371а-1 and №2960). Press briefing participants went on to say that the draft law’s authors considered technical details but did not make concessions on primary issues. Thus, according to the attendees, businesses will carry all risks related to the system’s flaws. “Almost all the technical aspects have been taken into account. Unfortunately, the State Financial Service has not made a single concession bearing potential corruption risks. We did not receive any explanation on this issue,” said Neskhodovskyi.

Participants of the press briefing emphasized that businesses and experts will continue explaining and initiating changes to the Internal Revenue Code that refers to the VAT reform.

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